America’s Unprecedented Debt Problem

Then-Fed Chair and current Treasury Secretary Janet Yellen answers questions at the March 2016 FOMC press conference. March 16, 2016.

You have probably heard politicians and Nobel-winning economists in certain New York newspapers downplaying the danger that $31 trillion in debt poses to America, but no one is falling for that. Anyone who has had to balance a budget or even pay their credit card debt understands the danger of the American government owing lenders $240,000 per household. Cato Institute’s Romina Boccia and Domink Lett explain the high costs that all that debt places on America, concluding:

If policymakers delay action until a fiscal crisis is on their doorstep, they could be forced in‐​between a rock and a hard place of massively cutting spending and or aggressively raising taxes. Studies reviewing the experience with European austerity measures and other measures taken by select OECD countries to stabilize their government finances indicate that the most successful deficit reduction strategies focus on spending cuts, especially to social programs and government bureaucracies. Increasing taxes was less effective at reducing deficits and more economically harmful.

Debt Default and Hyperinflation. Alternatively, policymakers might renege on the terms of existing debt or monetize the debt, thus boosting inflation. Both options are extremely unlikely to achieve the intended result of lightening the U.S. debt load. They are too economically costly. Defaulting on the debt is creditors’ worst fear. In most cases, it results in widespread financial chaos. Even if lenders would be willing to extend additional credit, they would demand much higher interest premiums, putting the U.S. government even deeper into the debt hole. The other bad option of inflating away the debt would worsen overall economic performance by reducing the purchasing power of the dollar and by being a de facto tax on savings and other investments. It would also quickly become priced into future bonds as investors would require higher interest rates to make lending profitable. In the worst case, monetizing the debt could lead to Weimar‐​style hyperinflation and economic collapse.

Debt is already at economically damaging levels. According to a review of recent economic literature by the Mercatus Center’s Jack Salmon on behalf of Cato, high public debt—defined as a debt‐​to‐​GDP ratio above 78 percent—has a consistently negative effect on economic growth. As America’s publicly held debt climbs above 100 percent of GDP, the United States is already experiencing slower economic growth from lower productivity through the crowding out effect, elevated interest rates, and less investment due to expectations of higher future taxes to service the debt. Lawmakers should adopt a concrete plan to stabilize U.S. debt as a percentage of GDP through fiscal restraint to unleash economic growth and boost American incomes before a potential fiscal crisis forces their hands. The debt limit is one such leverage point to significantly change the U.S. fiscal trajectory for the better.

Action Line: Don’t be fooled by the comforting words of big government enablers. There’s little risk America will default on its debt, but there are other ways too much debt can damage an economy. Prepare your portfolio now. If you need help, let’s talk.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.

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